Corporate leaders often proclaim that their employees are their most valuable asset. For many people, though, this is an empty platitude. The Gallup-Healthways Well-Being Index, which has been polling at least 1,000 American adults daily since January 2008, shows that people have felt worse about their jobs this year than any previous year. Why the disconnect? In talking to employees, and analyzing nearly 12,000 daily work diaries we collected, we have identified at least one cause: Managers don’t know how to show people that they are valued. In fact, they often unwittingly do the opposite.

The work diaries revealed what we call the progress principle: Of everything that can get people deeply, satisfyingly engaged in their work, the single most important is simply making progress on meaningful work. Since publishing our findings two months ago in The Progress Principle, we have received a number of questions about its practical implications. One of the most important — and troubling — questions has to do with compensation. If progress is more important than incentives or other motivators, does that mean that managers needn’t worry much about compensating people well for their work — as long as progress supports are in place? In its most cynical guise, the question asks if the progress principle gives organizations a rationale to lower salaries and cut benefits. Nothing could be farther from the truth.

As we see it, there are at least three reasons why people should be compensated fairly, even generously, for the work they do.

First, it is simply the right thing to do.

Second, it is in the best interests of organizations to compensate people well. There are two sides to the progress principle. Yes, progress on meaningful work leads people to feel great. But feeling great leads people to make more progress. We call this the inner work life effect. Inner work life is the continuous flow of emotions, perceptions, and motivations that each individual experiences when reacting to events at work. We found that, when people have positive inner work lives — when they are happy, feel intrinsically motivated by the work itself, and have positive perceptions of their work and the organization — they perform better. They are more creative, productive, committed to the work, and collegial. When inner work life is poor, performance suffers. Other researchers have found that, when employees in an organization have more negative perceptions of their organization at one point in time, the bottom line of the company is likely to be weaker in the future.

Inadequate compensation deflates inner work life. In fact, a recent survey by the American Psychological Association found that 49% of workers said that insufficient pay was increasing their stress level at work. To the extent that people are distracted by their personal economic situations, they are not spending their mental energies coming up with creative solutions for problems in the work.

Third — and this is something most managers fail to realize — compensation is more than just a paycheck. It is a signal to the individual about his or her value to the organization. The interior monologue goes something like this: “If I am compensated generously, that signifies to me that I am valued, and so is the work that I do. If I am being undercompensated, then I question my value to the organization and begin to see my work as unimportant. Why should I go the extra mile for them when they do not value me?”

Here’s a vivid example from the diary of a high-performing software engineer, the day she discovered that her spun-off unit was going to be reacquired by the parent company:

Today we have been told that we (HotelData) are now a wholly owned subsidiary of Dreamsuite Hotels. I was hired by Dreamsuite 28 years ago. But, a year and a half ago, after over 26 years of service, Dreamsuite forced me to sign a resignation slip. If I did not sign, I would be fired; if I did sign, I had a job at HotelData, but the benefits they promised me 28 years ago were all taken away. All I had was a job … a rotten thing after 26 years of service. I now have spent a year and a half serving, as a customer, this company that threw me away.

When people feel undervalued, like this, they leave at the first opportunity that comes their way. And who are the most likely people to receive such opportunities? The ones with the most marketable skills and talents — a company’s best people — and the ones that companies can least afford to lose. Like many of her coworkers, this engineer had left for greener pastures within the year. The signals from her company had become too loud to ignore.

What do you think? To your mind, does compensation serve as a signal of value, and what are the implications?